Q4 Productivity Reverses Course as Economy Slows

WASHINGTON – The productivity of U.S. workers abruptly reversed in the final quarter of last year as the economy slowed, the government said on Thursday, but productivity gains for the whole year were the largest in over 50 years.

"The underlying acceleration in productivity growth has likely now ended," said Ian Shepherdson, chief U.S. Economist at High Frequency Economics.

The Labor Department said the productivity of workers outside the farm sector dropped 0.2 percent in the fourth quarter after a rocketing ahead 5.5 percent in the previous three months of the year. The number was worse than market expectations of a 0.4 percent increase and was the first decline since the second quarter of 2001.

For 2002 as a whole, however, productivity soared 4.7 percent -- the fastest pace since 1950 and more than four times the 1.1 percent gain posted in 2001.

The report is likely to be a disappointment since growth in productivity, which measures the amount of goods and service produced for each hour of work, has been cited by analysts and the Federal Reserve as a key factor in the economic recovery.

The U.S. central bank's monetary policy-setting committee said last week, after leaving rates on hold at four-decade lows, that ongoing growth in productivity will help provide support to an "improving economic climate over time."

Unit labor costs, a closely watched measure of wage pressures, climbed 4.8 percent, the largest rise since the third quarter of 2000. That was higher than expectations for a 3.3 percent increase.

"Some may wonder whether this might push up inflation down the road, but we doubt it, as we suspect this trend will not last," said HSBC in a research note.

Analysts had said before the report was issued that unit labor costs were likely to rise as compensation has increased, but this is not being offset by strong productivity growth.

Hourly compensation adjusted for inflation rose 2.2 percent after an increase of 3.4 percent in the previous quarter.

Manufacturing productivity rose just 0.7 percent after an increase of 5.5 percent in the third quarter. However, for the year, manufacturing productivity rose 4.6 percent, the strongest rise since 1999.